Why would a company use LIFO instead of FIFO? Definitions of FIFO and LIFO FIFO and LIFO are two of the cost flow assumptions used by U.S. companies with inventory items. FIFO moves the first/oldest costs from inventory...
Why would a company use LIFO instead of FIFO? Definitions of FIFO and LIFO FIFO and LIFO are two of the cost flow assumptions used by U.S. companies with inventory items. FIFO moves the first/oldest costs from inventory...
Why does an inventory error affect two periods? Definition of Inventory Error An inventory error could be the result of any of the following: Omitting some items when physically counting inventory Double counting some...
What is a cash cow? A cash cow is often a profitable product or service that dominates a market and generates far more cash than is needed to maintain its market position. Companies may use the money from the cash cow to...
How can working capital be improved? Definition of Working Capital Working capital is defined as the amount by which a company’s current assets exceed its current liabilities. How Working Capital Can be Improved Some...
FIFO and LIFO is best with which type of products? Definition of FIFO and LIFO FIFO and LIFO pertain to the flow of products’ costs out of inventory to the cost of goods sold that is reported on the income statement....
What are phantom profits? The terms phantom profits or illusory profits are often used in the context of inventory (but can also pertain to depreciation) during periods of rising costs. The amount of phantom or illusory...
What is a current liability? Definition of Current Liability A current liability is: An obligation that will be due within one year of the date of the company’s balance sheet, and Will require the use of a current...
What is the advantage of using historical cost on the balance sheet for property, plant and equipment? Definition of Historical Cost Historical cost is the original cost of an asset including all the necessary costs to...
What is the accounting entry to close the sole proprietorship drawing account? Definition of Sole Proprietorship Drawing Account The drawing or withdrawal account for a sole proprietorship is a temporary owner equity’s...
What is accrued rent? Definition of Accrued Rent Accrued rent is the amount of rent that has not yet been paid by the tenant or received by the landlord for a past period of time. [If the tenant always pays the monthly...
What entry is made when selling a fixed asset? Defining the Entries When Selling a Fixed Asset When a fixed asset or plant asset is sold, there are several things that must take place: The fixed asset’s depreciation...
What is the days' sales in accounts receivable ratio? Definition of Days’ Sales in Accounts Receivable The days’ sales in accounts receivable ratio (also known as the average collection period) tells you the number...
What is a compilation? Definition of Compilation A compilation refers to a company’s financial statements that have been prepared or compiled by an outside accountant. A compilation is usually part of an accounting...
How does revenue affect the balance sheet? Effect of Revenue on the Balance Sheet Generally, when a corporation earns revenue there is an increase in current assets (cash or accounts receivable) and an increase in the...
What is leverage? Definition of Leverage In accounting and finance, leverage is the use of a significant amount of debt to purchase an asset, operate a company, acquire another company, etc. Since the cost of debt is...
What does it mean to check the extensions and to foot an invoice? To check the extensions on a purchase invoice means to verify that the number of units of each item multiplied by its unit cost agrees with the total...
What is a classified balance sheet? Definition of Classified Balance Sheet A classified balance sheet arranges the amounts from a company’s balance sheet accounts into a format that is useful for the readers. For...
What is meant by reconciling an account? Definition of Reconciling an Account Reconciling an account is likely to mean proving or documenting that an account balance is correct. Examples of Reconciling an Account When a...
What is straight line depreciation? Definition of Straight-Line Depreciation Straight-line depreciation is the most common method of allocating the cost of a plant asset to expense in the accounting periods during which...
What is a trial balance? Definition of a Trial Balance A trial balance is a bookkeeping or accounting report that lists the balances in each of an organization’s general ledger accounts. (Often the accounts with zero...
What is opportunity cost? Definition of Opportunity Cost Opportunity cost is the profit that was lost or missed because of some action or failure to take some action. Some refer to opportunity cost as opportunity lost....
How do the income statements of a sole proprietorship and a regular corporation differ? Definition of Income Statements of Sole Proprietorship and Regular Corporation The income statement of a sole proprietorship and a...
What is the difference between reserve and allowance? More than 60 years ago, accountants in the U.S. used Reserve for Bad Debts as the title of the contra account associated with Accounts Receivable or Loans Receivable....
What is the difference between gross margin and markup? Definition of Gross Margin Gross margin or gross profit is defined as net sales minus the cost of goods sold. However, some people intend for the term gross margin...
Where can I find an illustration of a common size balance sheet? You will find an illustration of a common size balance sheet under AccountingCoach.com’s Explanation of Financial Ratios. The common size balance sheet...
What is a valuation account? Definition of Valuation Account In accounting, a valuation account is usually a balance sheet account that is used in combination with another balance sheet account in order to report the...
Why are some expenses deferred? Definition of Deferred Expenses Under the accrual basis of accounting, an expense is a cost that is used up, has expired, or is directly related to revenues reported on a company’s...
What does it mean to recognize an expense? Definition of Recognize an Expense To recognize an expense means to report the proper amount of an expense on the income statement for the appropriate accounting period. When...
What is the difference between a debit and a debit balance? Definition of Debit A debit is an entry on the left side of a T-account. A debit entry is used to record assets, expenses, losses, and owner’s draws in their...
Why is interest expense a nonoperating expense? Definition of Interest Expense as a Nonoperating Expense Interest expense is the cost of borrowing money. For most companies the borrowing of money is not part of their...
What is the direct write-off method? Definition of Direct Write-off Method The direct write-off method is one of the two methods normally associated with reporting accounts receivable and bad debts expense. (The other...
What is a burden rate in inventory? I assume that the burden rate in inventory refers to a manufacturer’s indirect manufacturing costs, which are also referred to as factory overhead, indirect production costs, and...
What is a transposition error? Definition of Transposition Error A transposition error occurs when an amount is recorded incorrectly as the result of switching the positions of two (or more) digits. The switching of the...
What is net realizable value? Definition of Net Realizable Value Net realizable value (NRV) is the cash amount that a company expects to receive. Hence, net realizable value is sometimes referred to as cash realizable...
Where do dividends appear on the financial statements? Definition of Dividends Cash dividends are a distribution of a company’s profits. Financial Statements of a Corporation The main financial statements of a...
What is a LIFO Reserve? Definition of LIFO Reserve The LIFO reserve is a contra inventory account that indicates the difference between the following: Inventory cost reported on the balance sheet under the LIFO cost flow...
What accounts for the difference in inventory values between periodic LIFO and perpetual LIFO? Difference Between Periodic LIFO and Perpetual LIFO The difference between periodic LIFO and perpetual LIFO involves the time...
Which date is used to record a credit card transaction? When a business uses its credit card, the transaction date is the date the credit card is used, not the date that the credit card statement is paid. For example, if...
Do corporations issue both common stock and preferred stock? Some corporations issue both common stock and preferred stock. However, most corporations issue only common stock. In other words, it is necessary that a...
Why isn't the direct write off method of uncollectible accounts receivable the preferred method? Definition of Direct Write Off Method Under the direct write off method of accounting for credit losses pertaining to...
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